Jump to content

Welcome to the new Traders Laboratory! Please bear with us as we finish the migration over the next few days. If you find any issues, want to leave feedback, get in touch with us, or offer suggestions please post to the Support forum here.

  • Welcome Guests

    Welcome. You are currently viewing the forum as a guest which does not give you access to all the great features at Traders Laboratory such as interacting with members, access to all forums, downloading attachments, and eligibility to win free giveaways. Registration is fast, simple and absolutely free. Create a FREE Traders Laboratory account here.

Recommended Posts

A trader who implements a put backspread strategy is betting that an asset's value will fall. The technique involves selling more put options than purchased, usually 2:1, of the same underlying asset and with the same expiration. The profit potential is infinite when carrying out a put backspread, and investors control any potential losses by selling puts that satisfy the 2:1 ratio.

 

Moneyness Review for Puts:

 

In-The-Money (ITM) = Strike Price (more than) Market Price

Out-of-The Money (OTM) = Strike Price (less than) Market Price

At-The-Money (ATM) Strike Price (equals) Market Price

 

How to Implement a Put Backspread Strategy

 

attachment.php?attachmentid=29094&stc=1&d=1337787286

 

Disney stock is worth $48 (market price) in June.

1) Trader buys two (2) put options: DISJul45($2.00)

- 200 shares of Disney stock

- Strike Price $45 (OTM), expiring in 30 days

- Premium Cost of $2.00

2) Trader sells one (1) put option: DISJul50($4)

- 100 shares of Disney stock

- Strike Price $50 (ITM), expiring in 30 days

- Premium Cost of $4

3) The trader pays $0 to enter the market. [$400 (paid for puts) - $400 (received from sale)]

 

Result one: Disney stock remains at $45 in July.

a) Both the put options purchased expire worthless. (OTM)

b) The put option sold is ITM. The buyer exercises his or her right to sell the trader 100 shares at $50. The trader pays $5000 to the seller.

c) The trader sells 100 Disney shares in the open market, receiving $4500.

d) The trader loses a total of $500 after subtracting the prices paid for the shares from the share sale. [$500 = $5000 (paid for shares) - $4500 (received for shares)]

 

Result two: Disney stock falls (moderately) to $40 in July.

a) The put option sold is ITM. The buyer exercises his or her right to sell the trader 100 shares at $50. The trader pays $5000 to the seller and receives 100 shares.

b) The trader buys 100 Disney shares in the open market, paying $4000.

c) The two put options purchased are ITM. The trader exercises his or her right to sell the trader 200 shares at $45. The trader sells the 200 shares and receives $9000 from the buyer.

d) The trader loses a total of $0 after adding and subtracting the prices paid for the shares from the exercised puts. [$0 = $5000 (paid for 100 shares) + $4000 (paid for 100 shares) - $9000 (received from puts purchased)]

 

Result three: Disney stock falls (crashes) to $30 in July.

a) The put option sold is ITM. The buyer exercises his or her right to sell the trader 100 shares at $50. The trader pays $5000 to the seller and receives 100 shares.

b) The trader buys 100 Disney shares in the open market, paying $3000.

c) The two put options purchased are ITM. The trader exercises his or her right to sell the trader 200 shares at $45. The trader sells the 200 shares and receives $9000 from the buyer.

d) The trader loses a total of $1000 after adding and subtracting the prices paid for the shares from the exercised puts. [$1000 = $9000 (received from puts purchased) - $5000 (paid for 100 shares) - $3000 (paid for 100 shares)]

 

Result four: Disney rallies to $50 in July.

a) All the put options purchased expire worthless (OTM).

b) The trader loses a total of $0 since there was no cost to enter the market.

 

Advantages and Disadvantages of Implementing a Put Backspread Strategy:

 

Pluses: The upside to this type of strategy is that the investor can make substantial profits with limited loss-risk. An investor's profit potential is infinite when market price crashes, since theoretically any asset can reach a zero value. Investors can also enter the market without paying cash. The put backspread also limits the trader's loss potential to the terms of the put option sold. In large market upswings, all options will expire OTM, resulting in no-loss, since there is no cost to enter the market in a 2:1 backspread.

 

Minuses: The downside in using a put backspread strategy happens when the underlying asset's market price expires at-the money with the sold put. However, loss potential continues to decline any price in between the strike prices of puts sold and purchased

put-backspread.gif.22fb279cdf900051b56dbc3b0122d8a0.gif

Edited by Igor

Share this post


Link to post
Share on other sites

Result three: Disney stock falls (crashes) to $30 in July.

a) The put option sold is ITM. The buyer exercises his or her right to sell the trader 100 shares at $50. The trader pays $5000 to the seller and receives 100 shares.

b) The trader buys 100 Disney shares in the open market, paying $3000.

c) The two put options purchased are ITM. The trader exercises his or her right to sell the trader 200 shares at $45. The trader sells the 200 shares and receives $9000 from the buyer.

d) The trader loses a total of $1000 after adding and subtracting the prices paid for the shares from the exercised puts. [$1000 = $9000 (received from puts purchased) - $5000 (paid for 100 shares) - $3000 (paid for 100 shares)]

 

Shouldn't this be...

 

"The trader wins a total of $1000 after adding and subtracting the prices paid for the shares from the exercised puts. [$1000 = $9000 (received from puts purchased) - $5000 (paid for 100 shares) - $3000 (paid for 100 shares)]"

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.
Note: Your post will require moderator approval before it will be visible.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.


  • Similar Content

    • By Lwayne11
      I had a bad experience in trading. I did lost $17,350 in total and i when i try to cash out one story or the other keep coming up to me at every giving point of time so i give up on them.after several weeks i came across this agency,expert recovery that help me get back about 75 percent of my lost funds. I learnt thee is a class action court proceeding to sue scam binary companies but I believe that takes more time and money paid to lawyers is way expensive. You can talk to a recovery expert.
      Reach Asherellazar at protonmail dot com
    • By DHARMIL
      SELL BANKNIFTY F&O - ₹2300
      SELL NIFTY F&O - ₹2700
      SELL STOCKS F&O - ₹5000
      Contact : 9173302081
    • By Ninjatrader_Staff
      Here is a quick educational video we created on Options on Futures.
       
    • By Ninjatrader_Staff
      Options on futures are now available to trade through NinjaTrader Brokerage! This expansion allows options traders to save on their trades with NinjaTrader’s deep discount commissions and benefit from industry-leading support.
      Why Trade Options on Futures with NinjaTrader Brokerage?
      ·  Discount Pricing: Save on trades with simple low rates
      ·  Span Margins: Real-time portfolio margining
      ·  Low Minimum: Open your account with only $1000
      In addition to the FREE NinjaTrader platform included with all brokerage accounts, traders will also have access to the CQG Desktop web-based platform to trade options on futures.
      ·  Current Clients: Contact Brokerage Support to start trading options on futures
      ·  New Clients: Open Your Brokerage Account
      Let Us Know How We Can Help
      Contact our brokerage team at 312.262.1289 to discuss how NinjaTrader’s solutions can be customized for both new & experienced traders.

      Futures, foreign currency and options trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones financial security or lifestyle. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results. View Full Risk Disclosure.
    • By fuqs
      Let's assume I was able to imply dividends from liquid options for the next 3 years, but I want to price an option expiring in the 4rd year from now. How would practitioners normally extrapolate implied dividends? From what i've observed there is a significant risk premium in implied dividends far out (implied divs are sold at discount). Actually the dividend term structure is declining. Therefore probably it makes more sense to extrapolate implied dividend rather than historical growth
  • Topics

  • Posts

    • Date : 21st January 2022. Market Update – January 21 – Stocks Sink – Netflix & Peloton Crash. Stock markets sank again (Nasdaq -1.3%) Tech companies led the slide, (Peloton -24%, Netflix -18% post results. USD firmed as Yields & Oil dipped, Gold held onto to gains. Markets are nervous and risk aversion has picked up as investors eye shaky earnings, and waning confidence, with mounting tensions over Ukraine adding to geopolitical tensions. US Weekly claims hit a 3-mth high, EZ Inflation was an ATH and North Korea said it may resume testing its nuclear arsenal. Asian markets and AUD & NZD lower (AUDJPY -0.62%) ASX 200 (-1.2%), Nikkei 225 (-1.8%).   USD (USDIndex 95.65) ticks higher slips as Yields decline . US Yields 10-yr moved closed at 1.83% & trades at 1.785%. Equities – USA500 -50 (-1.1%) 4482 – USA500 FUTS lower again at 4467. USOil – Fell below $82.00 afrom highs at 87.95 on Wednesday, Inventories increased by 0.5m vs 2.3m drawdown. Gold – held on to gains topped at $1848 and holds $1838 now, holding the key 1830 support. Bitcoin under $40,000 back to test $39,000, FX markets – EURUSD back to test 1.1300 – 1.1322, USDJPY now 113.80 & Cable back to 1.3570, the week’s low. Overnight – UK Retail Sales plunged -3.7%, Consumer confidence slipped 4 whole points to -19 and Japanese core inflation was inline at 0.5%. European Open – The 10 US Treasury yield is up from overnight lows, Bunds are also finding buyers in opening trade, and the 10-year continues to shy away from turning positive, as ECB officials continue to push back against speculation of an early rate hike at the end of the year and market sentiment generally turns cautious. DAX and FTSE 100 future are posting losses of -1.4% and -1.1% respectively. Today – EZ Consumer Confidence, BoE’s Mann; ECB’s Lagarde, BoJ’s Kuroda Biggest FX Mover @ (07:30 GMT) EURNZD (+0.66%) Rallied from 1.6675 yesterday to breach 1.6800 now. MAs aligned higher, MACD signal line & histogram higher. RSI 73 OB but still rising, H1 ATR 0.0026 Daily ATR 0.0100. Always trade with strict risk management. Your capital is the single most important aspect of your trading business. Please note that times displayed based on local time zone and are from time of writing this report. Click HERE to access the full HotForex Economic calendar. Want to learn to trade and analyse the markets? Join our webinars and get analysis and trading ideas combined with better understanding on how markets work. Click HERE to register for FREE! Click HERE to READ more Market news. Stuart Cowell Head Market Analyst HotForex Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in FX and CFDs products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.
    • Best way to make money is forex trading however it still requires a lot of hard work needed to build necessary skills which are required to earn money from forex.
    • I bet he was referring to acquire all the basic necessary skills needed to start earning money from the forex trading.
    • Yes agreed we can do forex trading as part time in the start and when we learn trading we can switch to full time trading.
    • You will only earn from forex trading if you know how to trade and when to trade otherwise you will only enter this market to lose money.
×
×
  • Create New...

Important Information

By using this site, you agree to our Terms of Use.